As the covid-19 crisis has reduced liquidity in Europe’s real estate lending market, a growing cohort of capital managers has introduced debt strategies to sit alongside their more traditional equity investment activities.
For the founders of HB Titan, a real estate investment firm launched in December, it made sense to give lending against property equal billing to buying it outright in its investment proposition. The London-based firm’s website clearly identifies it as a “hybrid” investor and lender that can provide debt “across the capital stack”.
The firm launched with £1 billion (€1.2 billion) of private investor capital at its disposal. It is led by Alex Chan, previously head of the commercial real estate lending platform at LStar Capital, US private equity firm Lone Star’s credit business.
HB Titan’s investment director, Alastair Carmichael – formerly head of real estate finance at advisor Avison Young – leads all lending and investment activity across the UK and continental Europe. Real Estate Capital spoke to Carmichael to discuss why and how it will lend in European property markets.
Where will you target your capital?
We will be targeting real estate in the US, UK, and continental Europe, with a specific focus on hotels in the first instance.
Offices are number two on our hit list and there will be more opportunities there towards the back end of this year with upcoming acquisitions, existing lenders needing to exit, and refinancings.
We can also do joint venture equity, buy existing debt, or recapitalise businesses.
Why the hybrid equity/debt approach?
Our principle is that if we would buy an asset, we are even more comfortable lending against it, and require a lower return for the lower risk and the lower level of involvement and time we need to invest. It is very much on a case-by-case basis – we have a very flexible mandate. We will go where the appetite and the opportunity in the market is.
We are effectively an evergreen fund. Our priority is first to protect investor capital and, second, generate a long-term risk-adjusted running yield. We underwrite each asset to a valuation we would be comfortable owning it at. Then, depending on the ask, we can look at being at 60 percent of that valuation if a sponsor wants senior debt, or 75 percent if they want stretch senior or mezzanine, or even higher percentages for recapitalisation opportunities.
Is your debt focus a response to the covid-19 crisis?
The idea has been two years in the making. But certainly, the last year has accelerated structural shifts that were already happening in the market that we were looking to take advantage of. Covid-19 has been the catalyst to the launch, but the dynamics of the market are what we were expecting from the next downturn.
How much lending risk do you aim to take?
We will be somewhere between value-add and opportunistic, in terms of return requirements. For us, value-add is where we are looking at senior debt or whole loan opportunities, and opportunistic is where we may take an equity position. In the hospitality space, for example, mainstream lenders are pulling up the drawbridge, which creates an opportunity for us. Hotels will bounce back, but because there are very few lending options out there, we can achieve a reasonable risk-adjusted return.
Why are offices a focus?
Last summer, when restrictions eased, people had a glimpse of the new normal in hospitality. But in offices, guessing the future landscape is a crystal ball-gazing exercise. While there have been positive noises around transactional and lettings activity, you suspect there have been a number of underlying incentive packages that have probably been put in place to get deals done. So, the office space will have liquidity issues.
We will look at some transitional opportunities in the core office market, including repurposing, but the focus will be on the ‘hub-and-spoke’ commuter locations where there is structural demand for offices. We think the hub-and-spoke model of a corporate ‘brand ambassador’ headquarters and smaller local offices near a large proportion of staff will be the way forward for many firms.
How does your investor/lender mindset affect the lending terms you will offer?
The capital is very flexible so we can look at short-term lending, up to five years-plus loans. Our thinking is: if we were to own the asset, what would be an appropriate debt package? For example, hotels will take time to stabilise, so we recognise income coverage ratios are not helpful now. It is about rightsizing to the deal.
How do you expect the opportunity to evolve in the coming two years?
Currently, we are seeing lots of opportunity in the investment debt space for hotels. I think that will shake out into offices later this year and into 2022. I expect there to be non-performing loan opportunities and there may well in future be opportunistic equity investments as well as joint venture opportunities and development that we would look at.